Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2020 Earnings Presentation
31 slides from Two Harbors Investment's earnings presentation, May 7, 2020
Slide 1: First Quarter 2020 Earnings Call
First Quarter 2020 Earnings Call MAY 7, 2020
Slide 2: Safe Harbor Statement
Safe Harbor Statement FORWARD-LOOKING STATEMENTS This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and,
Slide 3: Executive Overview
Executive Overview Took Decisive Action in Unprecedented Market Conditions Stemming from COVID-19 Pandemic Quarterly Summary • Experienced unprecedented market conditions stemming from the global COVID-19 pandemic. As a result, we took decisive action to reduce portfolio risk and amass a strong defe
Slide 4: Book Value Summary
Book Value Summary Q1-2020 Q1-2020 Book Value (Dollars in millions, except per share data) Book Value per share Attribution of Decrease in Book Value Beginning common stockholders’ equity $ 3,969.2 $ 14.54 GAAP Net Loss: Realized and unrealized losses on Core Earnings, net of tax(1) 86.6 Credit Stra
Slide 5: Core Earnings Review
Core Earnings Review(1) (Dollars in millions, except per share data) Q4-2019 Q1-2020 Variance ($) • First quarter Core Earnings results Interest income $ 237.3 $ 255.5 $ 18.2 Interest expense 167.3 167.3 — ◦ Favorably driven by: Net interest income 70.0 88.2 18.2 ▪ Higher net interest income due to
Slide 6: Performance Summary
Performance Summary • Repo costs improved in the quarter, but this was offset by higher swap costs as 3-month LIBOR rates declined in the quarter • Expect to see improvement in repo costs as LIBOR has come down post quarter-end Realized Q4-2019 Realized Q1-2020 Annualized portfolio yield(1) 3.54% 3.
Slide 7: Financing Profile
Financing Profile ECONOMIC DEBT-TO-EQUITY(1) • 7.0x at March 31, 2020, compared to 7.5x at December 31, 2019 • Average leverage of 7.4x in the first quarter DIVERSE FINANCING PROFILE AGENCY RMBS • Outstanding repurchase agreements of $17.8 billion with 22 counterparties • Have not experienced any si
Slide 8: Transition to Self-Management
Transition to Self-Management NON-RENEWAL OF MANAGEMENT AGREEMENT • Announced election not to renew the management agreement with PRCM Advisers • Decision was a result of diligent, thorough and extensive months-long process led by the independent directors of our Board • Expect to pay one-time cash
Slide 9: Markets Overview - COVID-19 Pandemic
Markets Overview - COVID-19 Pandemic RAPID AND DRAMATIC VOLATILITY RESULTED IN UNPRECEDENTED SPREAD WIDENING • The COVID-19 pandemic had a swift and dramatic impact on the financial markets in March, causing extreme volatility and unprecedented spread widening across all asset classes • Interest rat
Slide 10: Markets Overview - COVID-19 Pandemic: Historic MBS Spread Widening
Markets Overview - COVID-19 Pandemic HISTORIC MBS SPREAD WIDENING • Current coupon spreads widened a similar amount compared to the 2008 financial crisis, but in a more compressed time period ◦ It took 10 days vs. 60 days to reach the wides, and another 10 days vs. 100 days to retrace to the tights
Slide 11: Markets Overview - COVID-19 Pandemic: Fed Interventions
Markets Overview - COVID-19 Pandemic EMERGENCY FED INTERVENTIONS THROUGHOUT MARCH STABILIZED THE MARKETS • March 3: Fed intervened with an emergency 50 basis point cut to try to calm the markets • March 15: The Fed cut rates again to zero. Additionally, the Fed announced that they would begin purcha
Slide 12: Portfolio Composition and Quarterly Activity
Portfolio Composition and Quarterly Activity PORTFOLIO ACTIVITY • Took the following actions in response to the COVID-19 pandemic liquidity crisis: ◦ De-levered Agency portfolio by selling approximately $18 billion of specified pools and TBAs ◦ Sold substantially all of the non-Agency securities, el
Slide 13: Specified Pools
Specified Pools SPECIFIED POOL QUARTERLY CHANGES EXAMPLE OF HIGH LOAN BALANCE 3.5(1) 4.5 140% • Despite falling rates and theoretically more 4.0 120% 3.5 valuable protection, specified pool payups fell Payup (Points) 100% 3.0 precipitously during the quarter, at times trading 2.5 80% 2.0 60% below T
Slide 14: Coupon Positioning & Performance
Coupon Positioning & Performance QUARTERLY REVIEW QUARTERLY TBA PERFORMANCE(1) 50 • Despite massive intraday and interday volatility in the RMBS spreads, quarter-to-date RMBS performed well, 40 with the middle of the stack outperforming their Ticks (32nds) hedges by about 1 point 30 • In March, when
Slide 15: Risk Positioning
Risk Positioning LOW RISK EXPOSURES COMMON BOOK VALUE EXPOSURE TO CHANGES IN SPREADS(1) • Exposure to mortgage spreads and interest 12% rates remains small 8% % change in book value 4.2% 3.2% • In a 25 bps spread widening, potential book 4% 1.7% value decrease of 1.4% 0% -4% (1.4%) • In a 50 bps ins
Slide 16: Special Topic - Mortgage Loan Forbearance
Special Topic - Mortgage Loan Forbearance(1) MORTGAGE FORBEARANCE RATE ANTICIPATED TO BE MANAGEABLE • As of April 28, 2020, 5.7% of our loans, by count, were in forbearance; 6.3% by UPB • Blue bars are cumulative forbearance rate, by number of loans, and shown on the left hand axis • Gray line (righ
Slide 17: Special Topic - Forbearance Scenario Analysis
Special Topic - Forbearance Scenario Analysis(1) CONFIDENT IN LIQUIDITY POSITION AND ABILITY TO MAKE FUTURE SERVICING ADVANCES • Congress enacted the Coronavirus Aid, Relief, and • Forbearance modeling is shown below in three Economic Security Act (CARES Act) scenarios: base case, moderate stress, s
Slide 18: Outlook - Return Expectations
Outlook - Return Expectations OPPORTUNITY SET IN OUR TARGET ASSETS IS VERY ATTRACTIVE TODAY • There are multiple near-term potential drags on earnings, including but not limited to: ◦ Sub-optimal capital allocation ◦ High cash balances ◦ Servicing advance facilities costs ◦ Higher sub-servicing cost
Slide 19: Appendix
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Slide 20: Special Topic - Servicing Advances
Special Topic - Servicing Advances ADVANCING OBLIGATIONS HAVE CHANGED COVID-19 • Under the CARES Act, a borrower can request initial forbearance relief of up to 180 days Borrowers in • Servicer is required to advance months of: forbearance ◦ 4 months of scheduled principal and interest, for Fannie l
Slide 21: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE(1) $1,000 200% 20% 9.1% 5.4% 6.7% $311.3 $201.0 $257.6 1.5% $56.8 0% $0 0% 36.2% 21.0% 25.7% -20% 5.7% -$1,000 $(2,086.7) -40% -200% -$2,000 (225.2)% -60% (52.1)% -$3,000 -400% -80% Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-20
Slide 22: Q1-2020 Operating Performance
Q1-2020 Operating Performance Q1-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 255.5 $ — $ — $ 255.5 Interest expense 167.3 — — 167.3 Net interest income 88.2 — — 88.2 Loss on investment securities — (1,080.7) (0.
Slide 23: Q4-2019 Operating Performance
Q4-2019 Operating Performance Q4-2019 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 237.3 $ — $ 1.1 $ 238.4 Interest expense 167.3 — — 167.3 Net interest income 70.0 — 1.1 71.1 Total other-than-temporary impairments an
Slide 24: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) December 31, 2019 March 31, 2020 Reconciliation of Comprehensive income (loss) to Core Earnings: Comprehensive income (loss) a
Slide 25: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Hybrid ARMs and 14.3% 15.0% 13.4% 1.1% Other 12.3% 30-Year Fixed 0.8% 5% & above 10.1% 10.0% 4.2% 6.5% 5.0% 0.0% 30-Year Fixed 4.5% 30-Year Fixed 4.0% Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 18.6% 35.7% MSR CPR 30-Year
Slide 26: Agency RMBS Portfolio
Agency RMBS Portfolio Weighted As of March 31, Market Value Weighted Average % Prepay Amortized Cost Gross Weighted Average Age 2020 Par Value ($M) ($M) CPR Protected(1) Basis ($M) Average Coupon (Months) 30-Year fixed 3.0% $ 2,636 $ 2,778 3.0% 100.0% $ 2,720 3.7% 5 3.5% 3,991 4,267 6.7% 100.0% 4,18
Slide 27: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Weighted Weighted Weighted Unpaid Average Average Average Average (dollars in Number of Principal % Fannie Coupon Loan Age Original Original 60+ Day 3-Month Net Servicing millions) Loans Balance Fair Value Mae Rate (months) FICO(2) LTV Delinquenc
Slide 28: Financing
Financing $ in millions Repurchase Revolving Credit Term Notes Convertible Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Payable Notes Borrowings Percent (%) Within 30 days $ 6,138.2 $ — $ — $ — $ — $ 6,138.2 32.7% 30 to 59 days 6,034.5 — — — — 6,034.
Slide 29: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2020 $ 3.6 1.806% 1.352% 0.6 2021 15.8 1.681% 1.685% 1.2 2022 2.6 1.911% 1.176% 2.5 2023 0.2 3.057% 1.683% 3.6 2024 and after 8.7 2.224% 1.555% 7.0 $ 30.
Slide 30: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $ 9.0 $ — 0.9 $ 2,550 2.27% 3M LIBOR 10.0 Total Payer $ 9.0 $
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